News you didn't see - US budget deficit is lower now vs before COVID

The end of March marks the halfway point of the federal fiscal year, and on Friday the Congressional Budget Office gave its update on the US budget up to that halfway mark. And what it shows is that the US budget deficit is plummeting.

The monthly deficits and cumulative shortfall so far in fiscal year 2022 are similar to those in 2019 and 2020. For the first six months of those two years, the cumulative deficits were $691 billion and $743 billion, respectively.

The deficit was much larger at this point last year because of spending for the federal response to the coronavirus pandemic. The higher outlays last year were driven largely by the recovery rebates (also known as economic impact payments) authorized by the Consolidated Appropriations Act, 2021 (CAA), and the American Rescue Plan Act of 2021 (ARPA). Spending also rose for unemployment compensation and for pandemic relief through the Small Business Administration (SBA).

Much of the drop in spending is due to the fact that COVID stimulus and relief programs have been wound down over the last year, as vaccinations have picked up, restrictions have been lifted, and jobs have come back.

Outlays for certain refundable tax credits totaled $203 billion—a decrease of $366 billion, or 64 percent. That reduction occurred largely because most of the second and third rounds of recovery rebates were paid in January and March 2021. Partially offsetting that decrease, several changes to the child tax credit increased outlays early in this fiscal year. Eligibility for and the size of the child tax credit were expanded, and advance payments of the credit were made between July and December 2021.

Outlays for unemployment compensation decreased by $186 billion, from $209 billion in the first six months of fiscal year 2021 to $23 billion in the first six months of 2022. That spending declined both because the enhanced benefits that were enacted earlier in the pandemic expired in September 2021 and because unemployment declined. In comparison, during the first six months of fiscal year 2020, just before the start of the pandemic, outlays for unemployment compensation totaled $18 billion.

Spending by the Small Business Administration decreased by $165 billion. In the first six months of fiscal year 2021, the SBA recorded a total of $184 billion in outlays, primarily from a second round of loans and loan guarantees made to small businesses under the Paycheck Protection Program.

The added spending and concern that is brought up with large levels of debt is the interest that has to be paid on that debt. Previously, this hasn’t been that big of a deal because the interest rates have been so low in recent years. But with prices and rates now on the rise, we may see this expense pick up.

Net outlays for interest on the public debt increased by $43 billion (or 25 percent), primarily because higher inflation this year has resulted in large adjustments to the principal of inflation protected securities.

The coming interest rate hikes would be a big problem if there was a big increase in new debt being issued. But because the deficit has fallen so fast, it may not be as much of a fiscal burden as one might have feared a few months ago.

It's also remarkable that some of these COVID aids have continued at high levels in FY 2022, and the concern is that this assistance may be slated to decline in the near future.

1. Medicaid +$38 billion – reflects the fact that recipients cannot be disenrolled under the COVID health emergency provisions, and that the Feds are temporarily covering a higher % of certain Medicaid services (I talked about that from Wisconsin's perspective in this post). When that ends, the number of recipients and costs from the federal side will likely go down.

2. Social Security +$33 billion – more beneficiaries of Social Security as Baby Boomers hit retirement age, but also an increase in benefits driven by higher inflation.

3. Food and Nutrition Service from USDA +$32 billion - increased SNAP and EBT benefits (especially for children) due to the COVID emergency.

4. Public Health and Social Services Emergency Fund +$21 billion - largely due to higher reimbursements to health care providers, and increased funds to pay for COVID testing, vaccination and therapy.

The question going forward is what happens for the next Fiscal Year for agencies who will have to grapple with higher prices. As of now, they are operating under a 2022 budget that assumed a lower level of cost increases than we are seeing today, which helps the fiscal picture today (since wages and revenues rise above that lower spending level), but will that mean spending has to increase to “catch up” to inflation and maintain the same level of services.

But what can’t be said is that the US budget deficit should be considered a major constraint on an increase in spending, because our deficit is in better shape now than it was 2-3 years ago, and Republicans had no problem with exploding supports and relief programs when Donald Trump was president at that time.

Plus, if they’re so concerned about the deficit, they can always reverse the GOP Tax Scam’s giveaways to the rich and corporate, and they can choose to designate more funds for the increased cost of Social Security and Medicare. But where would the campaign donations be in that?